Written by Aditya Soni
(Reuters) – Alphabet and Microsoft ignited a rally in tech stocks on Friday with earnings showing big AI investments driving growth, with big bets on Metaplatforms' weak outlook Allayed doubts that it would take time to pay off.
After spending billions of dollars on the infrastructure needed to support AI applications, Alphabet and Microsoft both expect quarterly revenue growth as more users take advantage of services such as the Copilot AI assistant and Gemini chatbot. reported that it exceeds.
AI services accounted for 7 percentage points of the 31% increase in revenue for Microsoft's Azure cloud computing platform from January to March, said Finance Director Amy Hood.
He added that near-term AI demand slightly exceeded the company's capabilities, which constrained growth in the quarter and highlighted the need for spending to expand infrastructure.
At Google, cloud revenue increased approximately 28% due to strong growth in Google Workspace, where the Alphabet division offers numerous AI capabilities powered by its large-scale language model Gemini.
The results were in contrast to social media giant Meta, whose stock fell 10% on Thursday, as it warned of higher spending and weaker-than-expected growth.
“This quarter shows that demand for generative AI from Microsoft's customers remains strong, and we continue to believe that Microsoft is in a leadership position in this GenAI environment,” said Gil Luria, an analyst at DA Davidson. “There is,” he said.
“The meta suggests that the results of even more investment could be years away, but Microsoft and Google are showing it right now.”
Alphabet's stock rose 12% in premarket trading as its first dividend and $70 billion share buyback sparked analyst interest.
The company plans to increase its market capitalization by about $200 billion, which will push it past the $2 trillion mark.
The world's fourth most valuable company reached this milestone on an intraday basis more than three years ago, according to LSEG Datastream, but had never closed above that level.
Microsoft was expected to rise nearly 4%, adding nearly $120 billion to its market value.
The results sent tech stocks such as Amazon.com Inc. and Apple Inc., which report earnings on Tuesday and Thursday, respectively, up 1% to 3%.
AI chip stocks Nvidia, Advanced Micro Devices and Marvell Technology also rose 1% to 2%, riding on optimism that a continued spending boom by tech giants will boost demand for semiconductors.
“All three hyperscalers I've talked to so far have been emphasizing similar messages about AI capital spending: This is an arms race, and the opportunities for AI are huge. “Spending will continue to be aggressive/above market expectations,” said Bernstein analyst Michael Chan.
Microsoft's capital spending increased $300 million from the previous quarter to $11.5 billion, while Alphabet's capital spending increased 91% year over year to $12 billion.
At least 19 Alphabet analysts have raised their price targets, with the median estimate rising to $176.65 from the previous close of $156. Microsoft analysts have raised their price targets on 17 occasions, with the median view on the current stock price being $475.
Microsoft's 12-month forward price/earnings ratio (PER) is 30.40 times, while Alphabet's is 21.63 times.
Some analysts believe a more premium valuation is warranted. “While Google Cloud showed improvement, it did not match Azure's growth. Azure's enterprise focus and its differentiated capabilities have played a role, and we (and the market) have seen better results than Amazon Web Services. “We're waiting,” Bernstein analysts said.
(Reporting by Gokul Pisharody and Sidharth S in Bengaluru and Samuel Indyk in London; Editing by Amanda Cooper, Savio D'Souza and Anil D'Silva)
